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Get a foot in the property door

Young people are told that property is an early, key investment they should make. As demand and prices continue to soar in such cities as Cape Town, they are often unable to afford the sort of property they would like to live in. Fortunately, for this tech and investment-savvy generation, there are other ways to own a little bit of real estate, from Listed Property and Reits to fractional ownership platforms, such as EasyProperties.

For most investors, listed property is the simplest and most transparent route to gaining exposure to real estate but, over the last 10 years, investors have had a love-hate relationship with the sector, according to Shane Packman, associate investment analyst at Morningstar.

Not that they can afford to ignore it outright, especially after the sector’s standout performance last year. Packman said the FTSE/JSE All Property Index (ALPI) delivered a total return of 10.70% in 2023, outperforming bonds (FTSE/JSE All Bond Index) at 9.70%, equities (FTSE/JSE All Share Index or ALSI) at 9.25%, and cash (Alexander Forbes Short Term Fixed Interest Index or STEFI Index) at 8.06%.

A relatively new addition to Listed Property that is giving South Africans a foot in the property door is fractional ownership. The platform EasyProperties, which is 100% owned by EasyEquities, is really catching the eye of investors with more than 111,000 active investors out of around 350,000 registered users after four years in business.

Like the Listed Property sector, EasyProperties offers exposure to property without the headaches of direct ownership, such a lack of liquidity and managing tenants. With EasyProperties, there are very low barriers to entry.

Rupert Finnemore, EasyProperties Chief Executive Officer, pictured right, says there is no minimum investment and many people make investments of less than R100. “Literally, your minimum investment is R1.”

Investors get access to state-of-the-art properties. Finnemore adds that the platform has recently bought a number of units in Cape Town at the “eye-watering price” of R55,000 a square metre, which “99.9% of the country” wouldn’t normally have access to.

EasyProperties combines fractional ownership and crowdfunding “to solve a lot of the friction points people normally encounter when investing in property, such as a lack of access to capital and opportunity”, says Finnemore.

EasyProperties brings together between 8,000 and 15,000 investors in each opportunity. The business approaches developer to buy, say, 10 units in a development and negotiates a bulk deal.

“In some instances, we are buying at 12% less than the market value or the asking prices, which means that our investors are really getting a good run at capital growth,” says Finnemore.

EasyProperties buys the units subject to raising the finance on the platform. A prospectus is created and a shelf company, an SPV, is set up for that property and the money is raised through an initial public offering process.

“If we are looking to raise R8 million to pay for these units, we will issue 8 million shares at R1 each and EasyProperties investors can apply for the shares.”

Once the target has been achieved, the SPV buys the property. It is managed and maintained by the EasyProperties rental management team. Rental is collected on behalf of investors, and profit is returned to them in the form of a dividend every quarter.

“Some of our properties paid a 9% dividend for this last quarter, but dividends vary based on market conditions,” says Finnemore, adding that in its four years in business, EasyProperties has paid R20.4 million in dividends.

However, he adds, “we are always at pains to remind investors not to forget about the capital growth, to stay in for the investment term to benefit from that”.

EasyProperties has each property independently valued every year to give an indication of the potential capital growth.  Each investment has a term of between five and seven years. But should an investor need to exit earlier there is a secondary marketplace, although Finnemore adds, “EasyProperties was not set up for people to trade in property shares”.

 “We are not a Reit, where guys are buying and selling every day … What we are trying to do is kind of create solid, stable normal property investments.”

He adds: “We try to tell investors to please not invest cash they are likely to need next month … We tell them that property is a medium-term investment.”

That said, if someone does get into a cash crunch, “once a quarter, EasyProperties holds an auction where investors can put up their shares for sale”.

“It’s just a marketplace, and the liquidity for any particular property hinges on the traditional notions of supply and demand.” There is often a price to pay for the liquidity. “Buyers in the auction aren’t necessarily coming to the auction to pay market value. They are looking for deals.”

Finnemore says EasyProperties tries to discourage investors from exiting early because the value of the investment is in the full term. “All of our projections rely on at least five years of capital growth.”

Still, he says, around 10% of the shares in each of the properties trade every auction. “The liquidity on those days is often bigger than a lot of the mid-cap stocks on the JSE. But it’s obviously because we do it only once every quarter so there is pent-up demand.”

‘You are an owner’

white and red wooden house miniature on brown table

The way the investments are structured has some of the feel of buying a property. You are choosing buying into a specific property, rather than investing in a property fund where fund managers making the choices.

“One of the beauties of fractional ownership is driving past a BlackBrick development or, say, the Rockefeller or Fynbos in Cape Town, whether you own a full apartment or you have got R1,000 invested there, you are an owner.”

 “At the end of that five years we are exiting that entire investment. The full value of your investment is going to be delivered to you,” he adds. “There is a great sense of ownership, that you are making your own investment choices.”

It is, of course, not without it risks, as Finnemore makes clear. “There is always a risk thing investing,” he says. “There is no guarantee that you are going to do well. A good example now has been the interest rate increases over the period since we launched. EasyProperties generally does a 70:30 equity raise so there is a 30% loan-to-value on all of the properties, which is fortunately quite conservative. But still the base rate then was, I think, 7.25%; now it is 11.75%. So there’s obviously interest rate risk.”

There are also other “normal risks” of investing in property. “You exposed to the same kind of risks as you would be as an owner in the property market, but your exposure is shared.”

Fractional ownership really is “democratising property ownership”, adds Finnemore. “That is evidenced by the fact that we’ve got 111,000 investors and our average investment size is R1,300, an amount that would normally give you zero opportunity to own property.”

He says that in any individual raise there will be in the region of 10,000 people investing and “around half of them will invest less than R100 each”.

EasyProperties has yet to officially exit an investment. The first official exit opportunities come up next year when that will be put to a vote among shareholders. EasyProperties holds 10,000 A+ shares in each of the SPVs, which means they can make management decisions. When it comes to exiting an investment, the process is governed by company law so EasyProperties will make the case for exit and put it to a shareholder vote. That makes 2025, EasyProperties’ 5th year in business, an interesting one to watch.

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